Many of the politicians in Washington, including President Obama during his State of the Union address, piously tell us that there is no way to balance the budget without tax increases. Trying to get rid of red ink without higher taxes, they tell us, would require “savage” and “draconian” budget cuts.

The Congressional Budget Office has just released its 10-year projections for the budget, so I crunched the numbers to determine what it would take to balance the budget without tax hikes. Much to nobody’s surprise, the politicians are not telling the truth…

The chart below shows that revenues are expected to grow (because of factors such as inflation, more population, and economic expansion) by more than 7 percent each year. Balancing the budget is simple so long as politicians increase spending at a slower rate. If they freeze the budget, we almost balance the budget by 2017. If federal spending is capped so it grows 1 percent each year, the budget is balanced in 2019. And if the crowd in Washington can limit spending growth to about 2 percent each year, red ink almost disappears in just 10 years.

When was the last time that our political leaders found the spine to balance the budget?

Mr. Mitchell perhaps gives Bill Clinton and the GOP Congress too much credit. Recall that the 1990’s involved huge cuts to the Defense budget (which came back to haunt us later). The savings in Defense outlays was plowed into all sorts of domestic goodies for both Clinton and Congressional constituencies, but the fact remains that the politicians somehow managed to keep overall spending down even in the midst of increasing revenues from a booming economy.

The lesson seems clear: get the Federal budget in line with revenues and start reducing the overall, Federal debt. This seems to be experience elsewhere in the world:

Comments

I somehow recall government spending increasing at a rapid clip under recent Republican presidents. Why was that? Wars, drug benefits, homeland security.. Republicans have their porkulicious fixations, spending desires, and spinelessness as well. Not to mention all the tax cuts given to the wealthy, equivalent to spending decreases when you net it all out and value government functions.

More importantly, however, one has to ask whether this fabled balanced budget is a valid goal anyhow. The answer is that no, it isn’t. If you understand economics, you also understand the nature of the fiat currency, meaning that we make it up as we go along. Taxes are burned as they are turned in, and government spending (federal, that is) is issued without any “financing” constraint, in principle. We can spend as much as we like, and indeed the government has to run net deficits to make up the vast amount of dollar leakage to our trade deficits, savings here and abroad, and economic growth. As long as the Chinese want to hold dollars, we have to make them. It’s hard work! We also don’t have to issue corresponding debt- that is a relic of the gold standard era and should be scrapped.

The danger, of course, is inflation. How’s that doing right now? Not a problem, indicating that the government is spending too little, not too much.

You really need to pay much better attention. Address your concerns to Glen. However, you are still a believer in statism and Keynesian economics (bless your heart). That’s failing us now, just as it has in the past, just as it will in the future. The state cannot decide what value is, any more than they can create value and wealth. You god will always let you down and forever disappoint you. It’s just an idol made in your image.

On January 29, 2011 at 8:07 pm, TS Alfabet said:

Burk,

Inflation is very much a problem and, with the price of oil pushing steadily up to the $100/barrel mark, it is inevitable.

Are you Obama by any chance? You have the same annoying habit of dodging the issue by essentially saying, “Well the guys before me did it, too!”

Take a look at the EU. For some strange reason, all of the economies there that abandoned fiscal discipline and balanced budgets are in the trash can while the one economy that was relatively disciplined and balanced (Germany) has shown impressive growth over the last 16 months or so. Even spendthrift Britain has abandoned the discredited notion that government can spend its way out of a recession, especially a deep one like this.

On January 31, 2011 at 9:41 am, Dave said:

Burk’s economic points may qualify him for service on Obama’s Council of Economic Advisors, but nothing else. He ignores the opportunity cost and loss of economic activity associated with taxation. In the world according to Burk, we are just as good off with 100% taxes as we are with 10%, because we are just as well off with the government spending dollars as we are with free people interacting in free and fair markets. Not even Christina Romer could make that logic work, but then perhaps Obama ‘just doesn’t have enough steel in his spine’ and needs to be more like Pelosi.

The trade deficit is a symptom of a capital deficit in the country. The Chinese are not hungry for dollars. They have excess savings, and we have a savings deficit (i.e. a federal budget deficit). If we were not ‘burning tax receipts’, those yuan/dollars would find work elsewhere.

So far as a ‘financing constraint’, it seems the peripheral European economies are finding out that there is, in fact, a financing constraint. In addition, in the world according to Burk, there should be no such constraint because the inflation is ‘not yet problematic’. So what is the problem there? Return to the capital deficit, and the source of the plug – the excess savings in the world no longer wishes to finance Greek, Irish, and Portuguese deficits, and is seriously thinking about Spanish deficits.

Burk is not even competent enough to be called ‘Keynesian’, because Keynes at least knew what he was talking about. He was just wrong in a Ricardian world.